Ch 2 - The Nature Of Insurance

Front 1

Adverse selection

Back 1

selection against the company or the tendency of people with higher risk to seek or continue insurance to a greater extent than those with literal or less risk. Occurs when the percentage of poor risks among those covered by issued policies exceeds the ratio predicted by the actuaries when they designate the policies. This also consists of the tendency of policy owners to take advantage of favorable options in insurance contracts

Front 2

Hazard

Back 2

This is any factor condition or situation that creates an increased possibility that a peril or (a cause of a loss) will actually occur

Front 3

Homogeneous exposure units

Back 3

These are similar objects of insurance that are exposed to the same group of perils an object of insurance can be a person a business or a piece of property each unit represents one of many similar risks that are undertaken to be insured by an insurance company

Front 4

Indemnify

Back 4

This is the act of restoring insureds to their financial condition that existed prior to the loss

Front 5

Indemnity

Back 5

This is the amount needed to restore an individual to the financial condition he was in before he suffered a loss. An indemnity can be a reimbursement or a fixed dollar amount

Front 6

Indemnity contract

Back 6

This is a contract that attempts to return the insured to her original financial position

Front 7

Law of large numbers

Back 7

This is a fundamental principle of insurance. The larger the number of individual risks that are combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given.

Front 8

Loss

Back 8

The insurance industry defines as the unintentional decrease in the monetary value of an asset due to a peril

Front 9

Loss exposure

Back 9

This is the risk of a possible loss

Front 10

Loss exposure unit

Back 10

This refers to each individual, organization, or asset that's exposed to the potential of financial loss due to a defined peril. When loss exposure units are aggregated together, the maximum potential loss expresses the overall loss expenditure

Front 11

Moral hazard

Back 11

This is a type of hazard that exists because of the effect of an insured's personal reputation, character, associates, personal living habits, or degree of financial responsibility. This also includes criminal activity

Front 12

Morale hazard

Back 12

This is a hazard that arises from an insurance indifference to loss because of the existence of insurance. Often associated with having a careless attitude.

Front 13

Peril

Back 13

The immediate specific event that causes loss and gives rise to risk. They can be named or left open

Front 14

Physical hazard

Back 14

This is a physical or tangible condition that exists in a manner which makes a loss more likely to occur

Front 15

Primary insurance company

Back 15

When more than one policy covers the same claim, refers to the 1st policy to pay

Front 16

Primary insurance company

Back 16

As it relates to reinsurance, they write a policy to cover a risk in the marketplace. They then surrender a portion of the risk to a reinsurer and the reinsurer assumes the excess risk for a reinsurance premium

Front 17

Pure risk

Back 17

This is a type of risk that involves the chance of loss only, there's no opportunity for gain. Thrse are the only form of insurable risks

Front 18

Reinsurance

Back 18

This is the acceptance by one or more insurers or as of a portion of the risk underwritten by another insurer that has contracted with an insured to provide coverage for the total value of a loss exposure

Front 19

Risk

Back 19

This is the uncertainty regarding loss. The probability of a loss occurring for an insured or prospect

Front 20

Risk avoidance

Back 20

This occurs when individuals evade risk entirely. It's the act of not participating in an activity that could Possibly cause a loss.

Front 21

Risk management

Back 21

This is the process of analyzing exposures that create risk and then designing programs to address them

Front 22

Risk reduction

Back 22

This is the Management strategy that focuses on taking actions Which decrease the chances of a loss occurring. It also refers to action taken to lessen the severity of a loss if one occurs

Front 23

Risk retention

Back 23

This is the act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. A person maintains a certain amount of reserves to address unexpected expenses that are caused by insurable losses. often associated with self insurance

Front 24

Risk selection

Back 24

This is not a risk management technique that's used by consumers. Instead, it describes the insurance company's process for determining whether to cover a new loss exposure. If done correctly, the ratio of losses to premium should reflect what actuaries predicted when they created the product, established the price, and set the underwriting criteria

Front 25

Risk sharing (risk pooling or loss sharing)

Back 25

This is the risk management technique that manages an individuals risk by sharing the possibility of loss with others and spreading the cost over a large number of individuals. This technique transfers risk from an individual to a group.

Front 26

Risk transfer

Back 26

This is the act of exchanging the responsibility for a significant potential loss gin potential loss or risk to another party in exchange for a smaller, preset cost or premium

Front 27

Self insurance

Back 27

This is a risk retention process. A self insuring individual or organization maintains monetary reserves to cover potential costs in the event of a financial loss occurring

Front 28

Speculative risk

Back 28

This is a type of risk that involves the chance of both loss and gain. This type of risk is not insurable.

Front 29

Prevention

Back 29

Another management tool involves taking actions to eliminate damage or loss